May 31 (Bloomberg) -- Taiwan’s dollar had its biggest
monthly drop since September and benchmark five-year government
bonds completed their biggest rally in nine months on concern
Europe’s debt crisis will sap demand for exports.

Overseas shipments fell 5.2 percent in May from a year
earlier, a third month of contraction, according to the median
estimate of economists in a Bloomberg survey before government
data due on June 7. Global funds reduced holdings of local
stocks by $3.8 billion this month, exchange data show, after the
island’s industrial production dropped for a second month in
April and the jobless rate increased.

“Taiwan’s economic outlook is pretty bleak,” said James
Wang, a debt trader at Yuanta Securities Co. in Taipei. “The
central bank may be allowing the Taiwan dollar to drop more to
support exports.”

Taiwan’s dollar weakened 2.1 percent this month and 0.3
percent today to NT$29.86 against its U.S. counterpart,
according to Taipei Forex Inc. The currency’s one-month implied
volatility, a measure of exchange-rate swings traders use to
price options, rose 23 basis points today to 5.93 percent.

The yield on the government’s 1 percent bonds due January
2017 fell six basis points in May and two basis points today to
0.94 percent, according to Gretai Securities Market. That was
the lowest level since Feb. 29.

The overnight interbank lending rate was little changed
today at 0.514 percent, according to a weighted average compiled
by the Taiwan Interbank Money Center.